3

What Can AMD Really Do in 2014?

Modeling a business that participates in a market with fairly predictable growth seems like child's play in comparison to trying to model a company that participates in an eclectic set of businesses with some growing and others shrinking. An additional twist in the world of high tech is that market share positions can often be incredibly volatile and highly dependent on the competitive positioning of products from multiple companies. Advanced Micro Devices (NASDAQ: AMD) is probably the semiconductor industry's biggest "battleground" stock. The key question that really matters above all else: What can AMD do in 2014?

Four important questionsIn order to understand how AMD's top and bottom lines -- and ultimately its share price -- will perform during 2014, it is important to ask the following four questions:

1. Will the PC market be in perpetual secular decline, or will it bottom out and rebound at some point? Along those same lines, how does AMD's competitive position in that market look against PC behemoth Intel (NASDAQ: INTC) ?

3. What will AMD's competitive position in the GPU market look like? Is the underlying discrete GPU market growing or is it stagnant or even declining?

4. How attractive is AMD's semi-custom pipeline? Can AMD build meaningfully on the success of its game console wins, or is this a one-hit wonder from a revenue/profitability perspective?

Answering the PC questionAMD's position in the PC market has largely deteriorated since Intel launched its Core 2 Duo processor in 2006. Since then, AMD has fallen behind in regard to performance and power in its PC chips. While AMD's server success continued on for a while after it lost its PC chip stamina, Intel eventually took back every point of server share that AMD had fought for -- and more. Intel currently holds over 95% of the server market, leaving AMD with under 5%.

The fundamental problems with AMD's position in PCs are both technological and economic. The technological problems stem from Intel's designs generally offering better performance per watt due to the company having a larger R&D budget and more advanced transistor technology. The economic problems are a result of Intel's process technology leadership delivering this improved performance and power while still selling chips that are nearly half the size of AMD's competing chips in some segments.

Going forward, it probably gets worse. Intel is transitioning its low-end PC line to products based on its low power/cost CPU core, and the platform costs will decline substantially as a result. This will allow Intel to price much more aggressively (and gain market share) while still maintaining excellent profitability levels. According to Intel's Kirk Skaugen at the Credit Suisse Technology Conference, the company has less than 50% of the low-end PC market – setting the stage for market share loss on AMD's part.

Dense servers should be a "wait and see"AMD has talked at length about dense servers and is even planning to launch some interesting low-power server parts in 2014. While it is still unclear as to why AMD would have any better luck with ARM servers than it did against Intel's higher performance/power processors, it's still too early to really estimate the market opportunity and AMD's potential share within that opportunity (since the space is rather crowded.) This is a wait-and-see play, though SeaMicro and its unique interconnect fabric coupled with AMD's years of experience in servers does give it a leg up on some of the smaller players.

Thinking about GPUsIn the discrete GPU market, AMD is in fierce competition with NVIDIA (NASDAQ: NVDA) . Given that the PC gaming market is growing and Intel has reported that its very highest-end Core processors are selling in record volumes, it would stand to reason that the high-performance discrete GPU market will continue to prosper. Can AMD win back market share from NVIDIA? Only time will tell, although NVIDIA is an exceptionally fierce competitor here.

Semi-custom The last area we need to look at is semi-custom hardware. The game console wins are certainly nice and will provide a nice revenue stream over the next five to seven years (if the prior console life-cycles are anything to go by), but what else is in the pipeline and how big are these opportunities? A couple of deals of similar magnitude to the console deals could really help AMD's shares take off. Until investors start seeing some evidence of these deals, though, it's probably best to take a more cautious view of the opportunity here.

Foolish bottom lineAMD's business is in transition. The weak PC market, coupled with the company's weak position in the PC market, is still a major concern. While other opportunities do look compelling, more data is needed before it is possible (or even responsible) to have a high-conviction view (either long or short) on the company's stock. For now, it's more of a speculative bet on a potentially much brighter 2014 if AMD's non-PC businesses really take off.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

AMD proved in Q3 that PC sales could decline 6% from the previous quarter, yet they produced a $22 million profit in that division against a loss in the previous quarter.

2) AMD is prepared for a further 10% decline in their PC business in 2014. AMD is prepared to EARN profits despite lower PC sales, and or lower market share.

3) A 10% decline in PC sales would put them at about $2.3 billion in 2014.

4) AMD 2014 PC sales at $2.3 billion will only be about 1/3 of total sales.

5) Therefore focusing on PC sales at AMD is a major mistake, but its all the bashers can talk about.

6) AMD will be able to at least break even in the PC area, based upon their recent proven ability to cut costs.

GPU division:

1) In Q4 AMD brought out new top end products that rival Nvidia's significantly more expensive top end products. Nvidia was forced to significantly cut the price of its high end products.

2) If anything AMD will gain market share, while Nividia will see their main profit generating products drop dramatically in price to compete.

3) I will assume that AMD breaks even on GPUs, since they have proven ability to do so.

CONSOLE area:

1) AMD is in all 3 of the consoles. Demand for new PS4 and Xbox is far exceeding supply.

2) CFO stated at Credit suisse conference that there will be 2014 consoles sales of appx. 40 million, with about half from the new consoles.

3) AMD will get revenues/royalties from ALL console sales in 2014 except the PS3.

4) CFO stated that yield and margins are increasing dramatically from the Q3 launch ramp.

He did NOT argue with a 20% net profit margin in 2014.

5) At appx. $100 revs per new consoles= $2 billion in revs. 20% profits= $400 million in profits from new consoles.

6) AMD gets royalties from Xbox 360 sales and rev/kprofits from WiiU sales. Net profits will = about $100 million in 2014. based upon $15 per console sold.

7) TOTAL Console profits= $500 million in 2014

8) AMD is well positioned to get additional console TV deals from many other PC companies that want to enter the living room.

SERVER Area:

1) Everyone with any knowledge of Cloud server demand acknowledges that DENSE servers will take at least 25% market share in a few years.

AMD's SeaMicro has proven by VERIZON is the most versatile and cost efficient architecture.

2) DENSE servers do NOT require high end Intel chips to out perform servers that do use high end Intel chips.

3) AMD created the 64 bit architecture that Intel licensed and uses in most of their server chips.

4) ARM 64 bit architecture is optimized for the exact needs of cloud providers+ high efficiency with low power use.

5) NONE of the handful of companies that will compete in the 64 bit ARM server market have any real experience or success in creating 64 bit server chips.

6) AMD created 64 bit server chips a DECADE ago.

7) Besides Intel, AMD is the only other successful server chip company.

8) AMD is positioned for huge server growth starting in the 2nd half of 2014 and continuing for the next 5 years.

9) AMD's server division will start to contribute significant revenue and profit growth in the 2nd half of 2014. I estimate appx. $500 million in 2nd half revenues in the server area with 20% net profits= $100 million in profits.

TOTAL AMD for 2014

1) PC = $2.3 billion in revs with no profits

2) GPU= $1 billion in revs with no profits

3) Server= $850 million revs , $100 million profits

4) Console= $2.2 billion revs, $500 million profits.

TOTAL : 6.35 billion revs, $600 million profits= 80 cents per share.

Top line 2014 revenue growth of 27% over 2013, with massive earnings growth.

Intel has no answer for Kaveri. At least not this quarter, but AMD is also not standing still.

Intel has no answer for Radeon. Intel venture into discrete graphics is laughably poor. But for sake of argument what happens to nVidia when Intel can put a halfway decent GPU on the market?

NVidia just lost market share to AMD in graphics. The consoles are graphics cores like it or not.

Intel just lost Market share to AMD in CPU (actually APU's but since they're still x86 Intel has lost share). Again consoles are x86 APU sales. Sales that Intel did NOT chalk up.

AMD is expected to NET by the end of March $1 billion in sales from PS4 and XBOX sales. Both Microsoft and Sony expect box sales to meet or exceed 5 million units each. 10 million x $125 ea = $1.25 billion. THAT IS ALL NEW SALES.

@rav55 come on, that's unfair- Intel is a much larger corporation (I'd say about 20-40% too big for its own good and I'd say massively overvalued but we'll see about that in the future)... so no one single product can bring that kind of money unless they turn over to an apple like company and sell 5-10 products in total and the entire world goes crazy :D.

Nvidia has the opportunity of becoming the biggest player in the server GPGPU space but it's being already contested by AMD and they will put a lot of pressure on them to gain market share, out of the 3 arch rivals of AMD Nvidia is the smallest and it stands alone, only after defeating NVIDIA can AMD hope to conquer Intel(I mean all in market share don't go all doom-n-gloom on me). The 3-rd enemy is the IT roman empire, the mother of all, the combined ARM armies... No chance on taking them head on not even if Intel/Nvidia& AMD would collaborate in doing it, they would have some short lived success but in the end they would be overrun by the sheer production power & marketing power of the rest, Apple alone could squish them. Now I would rather see a "reconciliation" route here...

Intel would be better off as a fab been saying this for years now... they have absolutely zero vision as a product developer - with intels production capacity, IP & money they should have made a killer x86 ultra mobility and graphics chip by now... but that ship has already sailed, they made a huge mistake when they decided to chop of instructionsets out of the atom... they basically equaled the play field for ARM: if you need to recompile anyway why not for something emerging that has much more suppliers & much more money dug into? Doing that they may have very well doomed the x86 for everybody... Temporary saving grace was none other then the failed Windows RT... if that would have been a smashing hit and ensured easy migration, x86 would have been dead by now. In about 3 years from now ARM cores will cover everything from ultra mobility to desktop... when/if that happens it will come down to suppliers... ARM has an army behind it: all the big names in the industry are behind ARM, Intel is the only one left on pure x86 soil... and they don't even have a GPGPU...

Like it or not the fate of the x86 lies squarely on AMDs shoulders now that intel has screwed up so badly so many times. AMD has one shot, and one shot only at this, with it's APU if they pull it off to get dynamic context switching by early 2015(with excavator) it might be the saving grace of x86... At this point Intel can only pull a hail mary to save it with... 16nm(maybe, reports show ARM will have 16 nm too by then so it's down to intel's capability to deliver a much better product on same node - which they were never really able to do in the first place, the others were always late to the party but had much better results)... otherwise we will see x86 die and become a footnote in history... what that means? Well... both AMD and Intel will have to drop x86 in favor of arm, and both will become equal players with Samsung, Apple, Qualcomm etc... wich will just stomp all over both. AMD has bought itself some time with the HSA Foundation and may see a different route for them, Intel, as it is positioned now, as the only remaining pure x86 builder is in a very bad position(good thing arm is not a locked down instructionset/core arch like x86)

It's all about supply chain, if there is nothing to differentiate between x86 and arm, and in about 3 years given current direction there won't, both x86 designers have to have exit strategies. Intel as a fab and AMD as a custom chip designer to offload Samsung/Apple design teams... both would operate with very thin margins (the likes we see now in the consoles ~15% for AMD or those at TSMC/GF for Intel). The strongest supplier will flood the market as it has happened time and again, not the best product but the best supply chain...

Now there might be a 3-rd option that would lessen the supply chain's power... 3d printing but it ain't coming nearly soon enough to save these 2 unless they can survive till ~2025-2035 with enough money &| non-obsolete IP to still matter.

@ken - we all know ashraf he is the usual monkey, monkeying around on fool and on other sites with useless writeups about non-news or half truths with no backing data or credibility... I think everybody has figured him out already, he's a die hard intel&nvidia fanboy and I mean that in the worst sense possible... he has never been and will never become a journalist, he just lacks the self control, analytical discern and detachment to do it. He might as well send all his articles to Inels fan post...

@mycardbrokedown.."we all know ashraf he is the usual monkey, monkeying around on fool and on other sites with useless writeups about non-news or half truths with no backing data or credibility... I think everybody has figured him out already"...I agree with your comments regarding the author. My question is how he is able to get away with it? The trouble I see, is that he is misleading investors and I feel he should be held accountable.

"Nvidia has the opportunity of becoming the biggest player in the server GPGPU space"

With some reluctance I have to disagree with you here. The GPGPU space has been effective only in that the cost per g-flop and now t-flop has been largely offset by sales of discrete graphics GPU's. Without the volume sales of consumer oriented GPU silicon, HPC use of GPU's and CUDA become problematic.

I am afraid that AMD stole nVidia's lunch money when it release R290 well within the second teir price point space. The is means ultimately a higher price for new GPGPU silicon as the mid-range volume is slowly drying up. The R&D cost for new silicon demands a high price point as well as a long shelf life as yields increase. But AMD has just ripped that model and reduced the market shelf life by at least 50%.

Radeon on die will eliminate the mid price point discrete graphics card as AMD so handily demomstrated "to developers, AMD pitted the A10-7850k against a computer paired with an Intel i7-4770k CPU and a GeForce GT 630 GPU." The i7 and GT-630 was crushed. The major point was missed entirely. Despite having an i7 CPU the GT-630 could not compete with the latest AMD APU. Allow me to put it another way. A good cpu will not make up for a poor GPU. The writing is solidly on the wall. Discrete GPU's will be replaced in the mid-price point by AMD APU's. And it will happen within 2 years. While the GT-630 may not be the bleeding edge of tech, it still makes money for nVidia through volume sales. It also doesn't cost much to produce as the process is very mature. Take all of that away then the development costs start to get very high.

Now how does that impact the outlook for nVidia's GPGPU market? The cost for new silicon gets higher when the volume consumer market dries up.

AMD can simply burn last years bleeding edge Radeon core onto next years APU and the development cost is recovered. When do you think the R-290 cores will turn up in an AMD APU?

While I certainly do not think that nVidia's days are numbered, I really don't think that new GPU silicon will be any more competitive than say Intels Knights Corners as accelerator co-processor.

nVidia ARM servers also do not have the huge advantage that AMD SeaMicro brings to the table.

And Intel will go it alone in the GPU space within 5 years when it will drop support for PCIe for anything but very high end work stations. You don't need PCIe with IGP. That is simply an unnecessary expense for MOBO oem's.

@rav55 - valid points... the problem is that if nvidia can't move entirelly to ultra enthusiast & PRO line... well let's just say it's rather grim... AMD will make -as you pointed out- GPU's in the low-to-mid range obsolete... Heck in 2015 we should get DDR4 if we also get triple/quad channel memory with that we might even see medium-high end GPU performance from an APU(I would wait for AMD to announce hex channel memory for servers - that would effectively mean we have a chance @ triple or even quad channel).

There is however hope for NVIDIA: ARM. In a few years maybe even by 2015 there will be high performance ARM cores possibly even desktop series. If that happens ANYBODY can build cpu's... that is rather bad news for the x86 camp and good news for nvidia. Problem is by 2015 the x86 camp might have figured out how to crush ARM in the ultra mobility area. If arm moves efficiently to desktop area and claims victory there - there is no need for performance crown... just some success - It will show everybody that the PC and all portable derivate devices are no longer x86 teritory, and we might see Apple build it's own chips again - this would be disastrous for x86 industry! And at the moment I see very little chance to avoid this. AMDs play with ARM is a very smart move! Because it will be able to directly offload the likes of Apple and Samsung of building & optimizing chips and just dump them into AMDs laps. AMDs server ARM chips will give them enough experience with the arch to quickly become very good at building them for others.

In that worls NVIDIA will become equal in every way with AMD and the one left in the cold would be Intel which would probably just Fab for everybody. To me AMDs strategy is exceptional and extremely well thought out... if it works... well... guess we'll just have to wait...

@kjurden - well I'm not even mad at him any more... he's just not worth it

Sending report...

Ashraf Eassa is a technology specialist with The Motley Fool. He writes mostly about technology stocks, but is especially interested in anything related to chips -- the semiconductor kind, that is. Follow him on Twitter: Follow @TMFAeassa